Equity-based Compensation

Equity Plan

The General Partner has adopted an equity plan (the “Equity Plan”), which provides for the grant of stock options, stock appreciation rights, restricted shares of Common Stock (“Restricted Shares”), restricted stock units (“Restricted Stock Units”), dividend equivalent rights and other stock-based awards to the General Partner’s and its affiliates’ non-executive directors, officers and other employees and advisors or consultants who are providing services to the General Partner or its affiliates. To date, the General Partner has granted fully vested shares of Common Stock, Restricted Shares, Restricted Stock Units and Deferred Stock Units, as defined below, under the Equity Plan. Restricted Shares provide for rights identical to those of Common Stock. Restricted Stock Units do not provide for any rights of a common stockholder prior to the vesting of such Restricted Stock Units. In accordance with U.S. GAAP, Restricted Shares are considered issued and outstanding. As is the case when fully vested shares of Common Stock are issued from the Equity Plan, for each Restricted Share awarded under the Equity Plan, the Operating Partnership issues a General Partner OP Unit to the General Partner with identical terms. Upon vesting of Restricted Stock Units, the Operating Partnership issues a General Partner OP Unit to the General Partner for each share of Common Stock issued as a result of such vesting.

The General Partner authorized and reserved a total number of shares equal to 10.0% of the total number of issued and outstanding shares of Common Stock (on a fully diluted basis assuming the redemption of all OP Units for shares of Common Stock) to be issued at any time under the Equity Plan for equity incentive awards. As of September 30, 2015, the General Partner had cumulatively awarded under its Equity Plan approximately 4.2 million Restricted Shares, net of the forfeiture of 3.5 million Restricted Shares through that date, 2.1 million Restricted Stock Units, net of the forfeiture of 0.2 million Restricted Stock Units through that date, and 0.1 million Deferred Stock Units, as defined below, collectively representing approximately 6.4 million shares of Common Stock. Accordingly, as of such date, approximately 86.4 million additional shares were available for future issuance.

During the nine months ended September 30, 2015, the General Partner awarded 5,634 common shares. The fair value of the awards was determined using the closing stock price on the grant date and expensed in full on the grant date. The Company recorded $0.1 million of compensation expense related to the awards for the nine months ended September 30, 2015, which is recorded in general and administrative expense in the accompanying consolidated statements of operations.

Restricted Shares

The Company has issued Restricted Shares to certain employees and non-executive directors beginning in 2011 through September 30, 2015. In addition, the Company issued Restricted Shares to employees of affiliates of the Former Manager prior to 2015. The fair value of the Restricted Shares granted to employees under the Equity Plan is generally determined using the closing stock price on the grant date and is expensed over the requisite service period on a straight-line basis. The fair value of Restricted Shares granted to non-executive directors and employees of affiliates of the Former Manager under the Equity Plan is measured based upon the fair value of goods or services received or the equity instruments granted, whichever is more reliably determinable and is expensed in full at the date of grant. During the three and nine months ended September 30, 2015, the Company recorded $0.6 million and $2.7 million, respectively, of compensation expense related to the Restricted Shares, which is recorded in general and administrative expense in the accompanying consolidated statements of operations.

The following table details the activity of the Restricted Shares during the nine months ended September 30, 2015.



	Restricted Shares		Weighted-Average Grant Date Fair Value
Unvested shares, December 31, 2014	2,684,062		$	13.84
Granted	4,010		9.76
Vested	(749,184	)	13.95
Forfeited	(424,654	)	13.64
Unvested shares, September 30, 2015	1,514,234		$	13.84

Time-Based Restricted Stock Units

During the nine months ended September 30, 2015, the General Partner awarded Restricted Stock Units to certain employees that will vest if the recipient maintains his/her employment over the requisite service period (the “Time-Based Restricted Stock Units”). The fair value of the Time-Based Restricted Stock Units granted to employees under the Equity Plan is generally determined using the closing stock price on the grant date and is expensed over the requisite service period on a straight-line basis, which is generally three years. During the three and nine months ended September 30, 2015, the Company recorded $0.5 million and $1.1 million, respectively, of compensation expense related to the Time-Based Restricted Stock Units, which is recorded in general and administrative expense in the accompanying consolidated statements of operations.

Deferred Stock Units

During the nine months ended September 30, 2015, the General Partner awarded Deferred Stock Units to non-executive directors under the Equity Plan (the “Deferred Stock Units”). Each Deferred Stock Unit represents the right to receive one share of Common Stock. The Deferred Stock Units provide for immediate vesting and will be settled with Common Stock on the earlier of the date on which the respective director separates from the Company or the third anniversary of the grant date. The fair value of the Deferred Stock Units is determined using the closing stock price on the grant date and is expensed in full on the grant date. During the three and nine months ended September 30, 2015, the Company recorded $0.1 million and $0.8 million, respectively, of expense related to the Deferred Stock Units, which is recorded in general and administrative expense in the accompanying consolidated statements of operations.

The following table details the activity of the Time-Based Restricted Stock Units and Deferred Stock Units during the nine months ended September 30, 2015.



	Time-Based Restricted Stock Units		Weighted-Average Grant Date Fair Value		Deferred Stock Units		Weighted-Average Grant Date Fair Value
Unvested units, December 31, 2014	—		$	—	—		$	—
Granted	642,808		9.68		90,076		8.75
Vested	(379	)	9.76		(90,076	)	8.75
Forfeited	(30,344	)	9.76		—		—
Unvested units, September 30, 2015	612,085		$	9.68	—		$	—

Market-Based Restricted Stock Units

During the nine months ended September 30, 2015, the General Partner awarded Restricted Stock Units to certain employees under the Equity Plan that are contingent upon the Common Stock reaching a certain market price (the “Market-Based Restricted Stock Units”). The Market-Based Restricted Stock Units will vest on December 31, 2015 if the employee is still employed as of such date and if the closing price of the Common Stock exceeds $10 per share for 20 consecutive trading days (the “Market Condition”) prior to December 31, 2015. If the Market Condition is achieved subsequent to December 31, 2015 but prior to December 31, 2017, the Market-Based Restricted Stock Units will vest on the date the Market Condition is satisfied, provided the recipient has maintained his/her continuous employment for the required period. If the Market Condition is not satisfied by December 31, 2017, the Market-Based Restricted Stock Units will become null and void. The fair value and derived service period of the Market-Based Restricted Stock Units as of their grant date is determined using a Monte Carlo simulation, which takes into account multiple input variables that determine the probability of satisfying the Market Condition. The method requires the input of assumptions, including the future dividend yield and expected volatility of the Common Stock. Compensation expense relating to the awards that are expected to vest upon achieving the Market Condition is recognized on a straight-line basis over the derived service period regardless of whether the Market Condition is satisfied, provided that the requisite service condition has been achieved. The amount of periodic expense recognized is based upon the estimated forfeiture rate, which is updated according to actual forfeiture activity. During the three and nine months ended September 30, 2015, the Company recorded $2.2 million and $4.3 million, respectively, of expense related to the Market-Based Restricted Stock Units which is recorded in general and administrative expense in the accompanying consolidated statements of operations.

Long-Term Incentive Awards

During the nine months ended September 30, 2015, the General Partner awarded long-term incentive-based Restricted Stock Units (the “LTI Target Awards”) to certain employees under the Equity Plan. Vesting of the LTI Target Awards is based upon the General Partner’s level of achievement of total stockholder return (“TSR”), including both share price appreciation and common stock dividends, as measured equally against a market index and against a peer group for the period from April 1, 2015 through December 31, 2017 (“LTI Performance Period”).

The fair value and derived service period of the LTI Target Awards as of their grant date is determined using a Monte Carlo simulation which takes into account multiple input variables that determine the probability of satisfying the required TSR, as outlined in the award agreements. This method requires the input of assumptions, including the future dividend yield, the expected volatility of the Common Stock and the expected volatility of the market index constituents and the peer group. Compensation expense relating to awards that are expected to vest based upon the General Partner’s expected TSR is recognized on a straight-line basis over the derived service period regardless of whether the necessary TSR is attained, provided that the requisite service condition has been achieved. The amount of periodic expense recognized is based upon the estimated forfeiture rate, which is updated according to actual forfeiture activity. During the three and nine months ended September 30, 2015, the Company recorded $0.6 million and $1.3 million, respectively, of expense related to the LTI Target Awards, which is recorded in general and administrative expense in the accompanying consolidated statements of operations.

The following table details the activity of the unvested Market-Based Restricted Stock Units and the LTI Target Awards during the nine months ended September 30, 2015.



	Market-Based Restricted Stock Units		Weighted-Average Grant Date Fair Value		LTI Target Awards		Weighted-Average Grant Date Fair Value
Unvested units, December 31, 2014	—		$	—	—		$	—
Granted	922,686		8.57		759,241		11.65
Vested	—		—		(828	)	11.77
Forfeited	(95,592	)	8.58		(60,614	)	11.77
Unvested units, September 30, 2015	827,094		$	8.57	697,799		$	11.64

Director Stock Plan

The General Partner adopted the Non-Executive Director Stock Plan (the “Director Stock Plan”), which provides for the grant of Restricted Shares of common stock to each of the General Partner’s non-executive directors. As of September 30, 2015, all shares awarded by the General Partner have vested and there was no activity within the Director Stock Plan during the nine months ended September 30, 2015.

The fair value of these Restricted Shares, as well as the corresponding General Partner OP Units issued by the Operating Partnership, under the Director Stock Plan is determined based upon the closing stock price on the grant date.

Multi-Year Outperformance Plans

Upon consummation of the merger with ARCT III, the Company entered into the 2013 Advisor Multi-Year Outperformance Agreement (the “OPP”) with the Former Manager, whereby the Former Manager was able to earn compensation upon the attainment of stockholder value creation targets.

Under the OPP, the Former Manager was granted long-term incentive plan units of the OP (“LTIP Units”), which could be earned or forfeited based on the General Partner’s total return to stockholders, as defined by the OPP, for the three-year period that commenced on December 11, 2012.

Pursuant to previous authorization from the General Partner’s board of directors, as a result of the termination of the Management Agreement, all of the approximately 8.2 million LTIP Units were deemed vested and convertible into OP Units upon the consummation of the Company’s transition to self-management on January 8, 2014 and were converted into OP Units on such date.

On October 3, 2013, the General Partner’s board of directors approved a multi-year outperformance plan (the “2014 OPP”), which became effective upon the General Partner’s transition to self-management on January 8, 2014. Under the 2014 OPP, individual agreements were entered into between the General Partner and the participants selected by the General Partner’s board of directors (the “Participants”) that set forth the Participant’s participation percentage in the 2014 OPP and the number of LTIP Units of the OP subject to the award (“OPP Agreements”). Under the 2014 OPP and the OPP Agreements, the Participants were eligible to earn performance-based bonus awards equal to the Participant’s participation percentage of a pool that is funded up to a maximum award opportunity of approximately 5% of the General Partner’s equity market capitalization at the time of the approval of the 2014 OPP which, following the Audit Committee’s and Company’s review, was determined to be $120.0 million, not the $218.1 million pool which had been used originally to calculate and report the awards issued to the Participants.

During the three months ended December 31, 2014, all of the Participants in the 2014 OPP departed from the Company and forfeited all of their interests in the 2014 OPP. As such, all equity-based compensation expense related to the 2014 OPP was reversed in the three months ended December 31, 2014 and no expense was recorded during the three and nine months ended September 30, 2015. During the three and nine months ended September 30, 2014, the Company recorded $2.7 million and $8.0 million of equity-based compensation expense relating to the 2014 OPP, which is included in general and administrative expense in the accompanying statements of operations.

The Compensation Committee of the General Partner’s board of directors (the “Compensation Committee”) elected to terminate the 2014 OPP on April 23, 2015, which had zero LTIP Units outstanding following the fourth quarter 2014 departures of the Participants. During the first quarter of 2015, the Compensation Committee, with input from its independent compensation consultant, elected to adopt the LTI Target Award structure described above.